Are Angels Muscling in on VC’s?

Read an article on AngelList.  It’s a pretty cool platform.  Here is a quote from the WSJ article:

Since launching six years ago, AngelList has shaken up the venture-capital landscape, creating new players on the industry’s traditional turf and giving rise to an alternative source of early-stage capital that gives founders more options and greater control over their companies, investors say.

I think that AngelList probably has had a small effect in Silicon Valley.  I don’t think it’s had a large effect anywhere else.  I don’t think traditional VCs feel especially threatened by AngelList.  However, it does make micro-VCs up their game.  If you are commodity money in a deal, might as well take it from an online platform where it might be easier to raise.

AngelList isn’t the only crowdsourcing platform out there.  Additionally, some startups have used Indeagogo or Kickstarter to validate what they are doing before seeking funding from venture capitalists.  The whole market is in flux constantly as innovation happens.  A rising stock market usually creates more risk taking, which is good for crowdsourcing platforms.  Additionally, if you are a potential angel that doesn’t live near a startup hub, online crowdsourced investing is a way to get access.

In Chicago, I haven’t heard of a lot of companies having success at raising a round on an online platform.  I could be wrong, but I just don’t hear a lot of chatter about success stories.  The platforms seem to be pretty ethnocentric when it comes to geography.  I know companies that have tried to raise rounds, but I don’t think they have been very successful.  It seems you still need that “bell cow investor” that will drive the process.  I cannot speak for other ecosystems, but would love to learn about entrepreneurs success/failure stories.

Personally, I have perused the platform but never written a check.  I prefer to do deeper dives into diligence, and build a relationship with the founders.  I don’t want to be commodity money in any deal at seed or Series A.

I also don’t think that AngelList has displaced many angel groups.   There are around 400 active angel groups in the US.  The Angel Capital Association has a database, and also is a great source if you want to start one up.

I do think that online platforms have given more companies the ability to raise seed capital. That’s a good thing for everyone.  I don’t see early stage financing as a fixed pie.  The more seed stage companies there are, the better it is for society.  Innovation moves us forward.

At the same time, I don’t think that crowdsourcing in any particular genre of finance is going to dominate the landscape.  Crowdsourcing isn’t going to displace traditional bank lending for example.  I also don’t see the demand for alternative assets like angel investing growing exponentially in the next ten years.  Money is flowing out of hedge funds into passive investments.  It’s hard to recruit angels.  Platforms like Lending Club have had their problems.

The data is pretty messy on early stage investing.  It’s getting better, but it’s hard to consolidate because it’s so fragmented.  It’s also highly dependent on other factors, such as which years initial investments were made and what industry they were made in.  It’s going to be hard to exponentially grow the sector until we have really solid academic data.

AngelList is 6 years old.  The average holding period of a successful startup is 7-10 years.  It used to be shorter, but the alimentary canal of exit is pretty full due to a lot of extraneous factors.  Year 7, we should start to see some exits trickle in more regularly on AngelList.  If people can make at least 2.5x their invested capital, AngelList should see growth.

It will be interesting to see if AngelList can muscle into Series A financings.  That’s when more traditional VCs would feel it the most.

  • awaldstein

    Why is it necessary to think of this as one muscling out the other?

    Angels and VC are apples and oranges.

    Why the need to see them fist to fist.

    • I think the nature of angels is changing. So many microfunds (defined as less than $100M by me!) Microfunds can band together and take companies through Series B. Depending on their limited partners, and their structure, they might be able to do all of the financing without the big VCs. Angels have gotten more sophisticated over the last ten years-and a lot more active. What will be interesting to see is if there becomes a big battle to get to the Series B table. It’s not as easy to get there as it used to be.

      • awaldstein

        Good point and thanks.

        I’m deep into learning about this now.

  • oldprof101

    Overall only 30% of the companies that seek funding on a crowdfunding platform raise the money that they seek. The great bulk of the firms that do raise money fail anyway. VC’s fund the best deals, Angels the next best. The leftovers go on crowdfunding platforms.

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